A Direct Consolidation Loan combines different federal student loans into a single loan, resulting in one monthly payment. If you have multiple federal student loans, this could be one way to simplify the repayment process and more easily stay on top of student loan payments. It will also set you up for eventual loan forgiveness, based on some requirements for different loan types and income-driven repayment plans.
While consolidation of student loans can lower your monthly payment by extending your repayment timeline, you typically end up paying more overall due to the additional interest you pay when lengthening your loan term. Before you commit, make sure to run the numbers and consider the pros and cons of a Direct Consolidation Loan.
Is a Direct Consolidation Loan a Good Idea?
Deciding if consolidation is right for you depends on whether your desire to simplify your payments outweighs the potential loss of some benefits.
Before you apply for a Direct Consolidation Loan, make sure you calculate how much you could end up owing over time, based on your new repayment schedule. And if there are Direct Loans you don’t wish to consolidate, perhaps because they are nearly paid off, you’ll still want to factor in those payments when calculating how much you can afford to pay each month on your consolidated loan.
Pros of Direct Consolidation Loans
Can simplify repayment: The first thing to consider is if you currently have multiple federal student loans with different servicers, meaning you have to log in to two or more separate accounts to pay your student loan bills each month. In this instance, consolidation can make life a little easier because the process will give you a single loan with a single bill each month.
Can lower your monthly payments: Consolidation can also lower your monthly payment amount, since a Direct Consolidation Loan has a repayment period of anywhere from the standard 10 years to 30 years . Direct Consolidation Loans are eligible for multiple repayment plans, but on a Standard or Graduated plan, you must have less than $7,500 in total debt to have the maximum repayment time set at 10 years. If your total debt is $60,000 or more, your Graduated or Standard repayment plan will be spread over 30 years. For all debt amounts in between, the term will be between 12 to 25 years for repayment.
Can allow you to switch from a variable to a fixed rate: If you have any variable-rate loans, consolidation will make it so you can switch to a fixed interest rate.
Can make loans eligible for forgiveness: If you consolidate loans other than Direct Loans, such as Perkins Loans (drawn before the program was discontinued), those loans may become eligible for Public Service Loan Forgiveness (PSLF) once consolidated, whereas they were not eligible before.
Cons of Direct Consolidation Loans
Can lead you to make more payments and pay more in interest: As we mentioned, unless you have less than $7,500 in total debt, your repayment period will be extended beyond the standard 10 years. This means you will make more payments and pay more in interest, unless you switch to a different student loan repayment plan.
Can make you lose some benefits: Consolidation can also cost you some benefits that only non-consolidated loans are eligible for, including access to some loan cancellation options. It’s a good idea to check in with your loan program before opting for a Direct Consolidation Loan.
Can cause you to lose credit for payments toward loan forgiveness: One of the most important things to consider before consolidation is that if you are currently paying your loans using an income-driven repayment plan, or have already made qualifying payments toward PSLF, consolidating your loans will result in the loss of credit for payments already made toward loan forgiveness.
How to Apply for a Federal Direct Consolidation Loan
The Direct Loan Consolidation application process is available through StudentLoans.gov and comes with no fees. You simply fill out the online application, or if needed, you can print out a paper version and mail it. To make things easier, it may help to gather all of your loan records, accounts and bills on hand as you work through the form. The process takes about 30 minutes total.
Almost all federal student loans are eligible for consolidation. If you have private education loans, you cannot consolidate them with your federal loans. Also note that you can’t consolidate your loans while in school and must graduate, leave school or drop below half-time enrollment in order to pursue consolidation. Parent PLUS loans can’t be consolidated with loans in the student’s name.
You can also select which loans you do and do not want to consolidate on your loan application. For instance, if you have a loan that will be paid off in a short amount of time, you might consider leaving it out of the consolidation, or if you have already made qualifying payments toward forgiveness on certain loans.
There might be other reasons you don’t want to include a certain loan in your Direct Consolidation Loan — consider the features of each individual loan before deciding whether to consolidate. Of course, if you keep one or more loans out of the Direct Consolidation Loan, you’ll end up with at least two different payment plans and monthly student loan bills.
Remember to keep making payments on your loans during the application process, until you are notified that they have been paid off by your new Direct Consolidation Loan. Your first new payment will be due within two months of when your Direct Consolidation Loan is first paid out.
Repayment Plans for Consolidation Loans
A Direct Consolidation Loan will have a fixed interest rate. The fixed rate will be the weighted average of all of the interest rates for the loans you are consolidating, rounded up to the nearest one-eighth of a percent. This means that the interest rate on your largest loan will have the most impact on your consolidation interest rate, whether that interest rate is high or low.
When you apply for a Direct Consolidation Loan, you must also be prepared to select a repayment plan. Many repayment plans are available for Direct Consolidation Loans, including:
• Standard repayment plan
• Graduated repayment plan
• Extended repayment plan
• Revised Pay As You Earn Repayment Plan (REPAYE)
• Pay As You Earn Repayment Plan (PAYE)
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR)
Consolidation for Defaulted Student Loans
Consolidation can also help student loans that are currently in default. Student loans will go into default after 270 days without payment, which can result in consequences and loss of benefits, such as damaging your credit score or possible wage garnishment.
Since loans in default are accelerated, and the entire unpaid balance becomes due when you enter default, consolidation is worth considering since it allows you to pay off one or more federal student loans with the new Direct Consolidation Loan.
Once your consolidated loan is out of default, you can repay the Direct Consolidation Loan under an income-driven repayment plan or make three consecutive payments. Direct Consolidation Loans are eligible for benefits such as deferment, forbearance and loan forgiveness.
Refinancing vs Consolidation for Student Loans
For those interested in a better interest rate or more favorable loan terms you could consider refinancing your loans instead. The process works much in the same way, but unlike consolidation, refinancing can combine federal student loans and private student loans, if you are still looking to make only one monthly payment.
Keep in mind that refinancing can result in the loss of some of the benefits for federal student loans under consolidation since you’re working with a private company and not the government. However, for someone looking for lower interest rates or lower monthly payments, refinancing is another option to consider.
Considering the pros and cons of a Direct Consolidation Loan, such as lowering your monthly payments, can help you determine if it’s the right repayment strategy for you. But make sure to run the numbers and see if the lengthened payback period or new interest rate will result in paying more than you are comfortable with in the long run.
If the idea of consolidation appeals to you, but the weighted consolidation interest rate won’t save you much over the life of your loan, you could consider applying for student loan refinancing with companies like SoFi.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.